ETFs

Marvelous Multi-Factor for Small-Cap Exposure

The past month hasn't been kind to small-cap equities, but that recent lethargy could give way to opportunities with the proper strategies, including the Principal U.S. Small-Cap Multi-Factor Index ETF (NASDAQ: PSC).

PSC’s underlying benchmark, the Nasdaq US Small Cap Select Leaders Index, “uses a quantitative model designed to identify equity securities (including growth and value stock) of small-capitalization companies in the Nasdaq US Small Cap Index (the ‘parent index’) that exhibit potential for high degrees of sustainable shareholder yield, pricing power, and strong momentum while adjusting for liquidity and quality,” according to Principal.

PSC's multi-factor layering make the fund an ideal consideration for investors seeking long-term small-cap exposure. Historically, smaller equities top larger rivals over longer holding periods, but there the trade-off is increased volatility. PSC can reduce some of that edge by focusing on companies that emphasize shareholder yield and those that have robust momentum.

PSC Bolsters Small-Cap Portfolio

PSC’s quality purview is important at a time when small-cap valuations, as noted above, may be a bit stretched, a scenario fostered by volatile companies with lumpy earnings trends.

That’s important because smaller companies often sport higher leverage and are more rate-sensitive than their large-cap counterparts. Bolstering the case for PSC are improving small-cap earnings revisions, confirming the group has some earnings momentum.

The $632 million ETF holds 473 stocks. When PSC rebalances, components' weights are capped at 0.70%, which diminishes single stock risk in the portfolio. Over the near-term, PSC merits consideration for other reasons.

Small-cap stocks tend to generate more volatile returns, but they provide diversification in retirement portfolios and help investors keep pace with inflation,” reports Ellen Chang for U.S. News & World Report. “While small-cap stocks derive their earnings domestically, these companies are less impacted by a strong or weak dollar. Smaller-cap names are generally more geared toward their local economy.”

Not only are small caps historically strong inflation fighters, but the group and ETFs like PSC merit near-term consideration because of the potential for out-performance if the U.S. economy resumes a strong growth trajectory following the coronavirus pandemic.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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